This is just a heads up. I just received an email from vanguard with the below statement (see italics at end of post). What this means is all investors will be forced to use government securities to house brokerage funds that haven't been allocated to active investments. Right now the default for vanguard is their highly regarded Prime Money Market Fund. It diversifies across government (e.g. Treasuries) and private (e.g. CDs) holdings. It also has some geographic diversification. Come the middle of next year investors will be forced into the Federal Money Market Fund which is US government only holdings. From an investor standpoint this means lower returns when "sitting on the sidelines" (based on historic data). It also means 100% federal control of those assets.

Next year, as a result of these rules, Vanguard Brokerage Services® (VBS®) will be making changes to which fund you'll use as your brokerage money market settlement fund.

You don't have to do anything now. We simply wanted to make you aware of the change we're making to be compliant with these money market reform rules by the October 14, 2016, effective date.

What this means for youIn February 2016, VBS will be adding Vanguard Federal Money Market Fund as a settlement fund option and using it as the money market settlement fund for all new brokerage accounts.

Later in 2016, all brokerage clients will be required to use Vanguard Federal Money Market Fund as their money market settlement fund. We'll send you information closer to the effective date of this change. But until then, you can continue to use your current money market settlement fund to settle your brokerage trades. However, as an existing brokerage client, you won't be able to switch your settlement fund between February and May 2016.

Liquidity fees and gates are tools to help money market fund managers keep the funds stable during times of extreme market duress. Under the rules:

A fund may impose a fee of up to 2% on redemptions if a fund's weekly liquid assets fall below 30% of its total assets.

A fund must impose a 1% fee on redemptions (with the option of imposing a fee of up to 2%) if a fund's weekly liquid assets fall below 10% of its total assets—unless the fund's board determines a fee would not be in the fund's best interest.

A fund may impose a gate—that is, suspend redemptions—for up to 10 business days in a 90-day period.

The fees and gates rules only apply to retail and institutional funds, although government funds may voluntarily adopt them if the fees and gates are previously disclosed to investors.

I'm definitely going to have to do some reading when I have a minute. I absolutely love Vanguard, but I don't have the same love for the Feds that make rules to mess with companies already doing a good job.

I worked hard for what little money I have been able to hand over to Vanguard. Don't screw it up.

I absolutely love Vanguard, but I don't have the same love for the Feds that make rules to mess with companies already doing a good job.

Vanguard rocks! Their expense ratios are fantastic and breadth of options are amazing. There are some things I disagree with (for example sticking mortgages and agency investments in their treasury funds) but overall I am very happy with them

Just to be clear, these rules are affecting all brokerages. Here is part of Fidelity's statement:

Once the new SEC rules are implemented, non-government money market funds (prime and municipal) may impose a redemption fee or temporarily halt redemptions if fund liquidity falls below regulatory limits.

Therefore, to assure shareholders that they will have daily access to funds used primarily for transactions, in December 2015, each of these originally prime funds transitioned its investment strategy to become a government fund. Shareholders approved these changes, and you do not need to take any action.

I'll be keeping an eye on this. I have a lot of faith in Vanguard and have been impressed over the years that they make changes to improve the returns of their long-term investors. That's one of the benefits of being the equivalent of a credit union in the larger investment universe, they don't owe a fiduciary duty to anyone but the people they serve.

Mary Jo White, the SEC’s chairwoman, says the new rules will “protect investors and the financial system in a crisis.” But the two dissenting commissioners fear they may do more harm than good. Allowing funds to suspend redemptions may actually spark runs, as investors rush to pre-empt any curbs, argues one of them. The other worries that the changes will divert the gullible to even more misleading investments, notably “stable value” funds. These cater to much the same niche as money-market funds and, despite their name, offer no guarantees. Rather than trying to protect investors from risk, the SEC might do better to ensure that the risks they are running are clearly disclosed.

Finally some articles are coming out about this. While the new regulations include some vague wording which allow some pension plans to remain in the traditional money markets, the plan sponsors fear of litigation is pushing them towards the government funds or to drop the safe investments. It is almost comical to see the SEC claim they are surprised that plan sponsors would view promoting investments with built-in hair cuts and "bank holidays" as being as being a recipe for investor lawsuits:

Concerned industry groups warn that, despite a relatively long window provided for the reforms to take effect, huge numbers of plan sponsors will all at once, as the end-date approaches, turn to re-examining their money market options in light of their fiduciary duty to plans and participants. The industry groups say they worry that plan sponsors will feel compelled to replace their retail MMFs with government MMFs, which will escape some of the new restrictions. The SEC has highlighted carve-outs in its rulemaking to prevent this outcome, but providers and fiduciary sponsors are being cautious.

Net of it is if you are on a pension plan you can expect a sizable amount of your funds migrating to these government (or perhaps more correctly, Federal Reserve) controlled vehicles.

I used to work at Vanguard. I was on the main campus at Vanguard's headquarters in Malvern, Pennsylvania for 7 years. I started off as a telephone service rep of the sort who had two NASD licenses (I had a Series 6 license and a Series 63 license). My job was to sit in a massive cube farm all day long and answer phone calls from people who had their 401(k) plans at Vanguard, and also to perform trades and other transactions within their accounts at their request.

I later got promoted to the role of Account Administrator. That gave me a slight raise, and a whole lot of headache, and a grueling amount of responsibility. Specifically, I was charged with the hands-on task of taking care of a small collection of 401(k) plans, so I was on the phone every day with the HR officers of various companies, discussing the various problems some people/employees of their companies were having with their 401(k)accounts, fielding legal questions, and shepherding massive in-bound wire transfers of the latest 401(k) contributions from the employees of my client companies. I lasted in that miserable, thankless job for 2 years before calling it quits.

In the end, I still have a ridiculous amount of information rattling around in my noggin about these kinds of accounts, and especially about how Vanguard itself operates (or at least how it DID operate when I was there).

I did NOT work in VBS (which is Vanguard Brokerage Services). Instead I worked in an entirely different division of the company which dealt exclusively with 401(k) plans, 403(b)'s, and a few pension plans and and Keough plans. In spite of that, I do have a general grasp of Vanguard's brokerage operation.

For anyone not familiar with how a brokerage account works ... you have your actual brokerage shares (like maybe your have 300 shares of Microsoft and another 287 shares of Shell Oil Company), and if you want you can periodically send more and more money into Vanguard at times to enable your account buy new shares of whatever the heck latest company stock shares that you want, any time you want. But any small bits of change left over after each stock purchase in your account always goes into your "sweep account" which is kinda like a little piggy bank off on the side of your account where they dump any leftover pennies after a trade goes through. That leftover small change is always kept in the form of SOME kind of a "cash reserve" fund, typically a "money market" type of fund. And the shorthand lingo used in the industry is to refer to such a fund as a "cash account" or else just plan "cash" (but it's not REALLY cash the way we understand it as if we were standing at the service counter of a McDonald's or a 7-11). Its called a "cash account" or a "cash fund" because the shares in that particular fund are ALWAYS an even-Steven dollar per share. This aspect of a "cash fund" is what makes any given money market fund so wonderfully "liquid."

At Vanguard, I was accustomed to seeing any one of the following cash funds as the "sweep accounts" for people who held brokerage shares:

Vanguard Federal Reserve Money Market (full of Federal Reserve notes from our good friends down at the Federal Reserve)Vanguard Treasury Reserve Money Market (full of US Treasury notes) -- THIS FUND IS NOW CLOSED TO NEW INVESTORS!!! In my experience at Vanguard, the only reason Vanguard ever closed a fund --a rare event indeed!-- was when way too many investors were suddenly swarming their way into the fund. So in order to protect the integrity and overall solvency of the fund, Vanguard had to set a cut off and stop new investors from entering the fund. Vanguard Prime Money Market (full of private banking notes from private banks but NOT anything governmental)

So here we see Vanguard --at the behest of the SEC-- preparing to irreversibly steer people away from the Prime Money Market and also (eventually) away from the Treasury Money Market, and force them exclusively into the Federal Money Market.

Let's hear it for our good friends down at the Federal Reserve.

::ETA::

I also recall one additional money market-style fund called the Vanguard Admiral Treasury Fund. I don't recall the difference between that Admiral Treasury Fund and the vanilla plain Treasury Fund. But they were IIRC two distinct funds.

Thanks for bringing up this topic. I received similar notice but have not thought through any action steps or how it's going to specifically affect my life and finances.

Right now I invest primarily through brokerage and I maintain significant cash balances in order to take advantage of market dips and to have some stability / hedging in my returns. Hmm.

Within IRA accounts, I don't think I have that much choice. I am not that concerned about how low a return is on a cash account as long as the value is stable, and as long as interest rates are *not* negative.

Within my taxable account, I could transfer the cash anywhere with no taxes or penalties. I could keep that money in a savings vs. money market account using my local bank.

I am not sure that the federal money market is going to be that bad. What are the real risks?

I am not sure that the federal money market is going to be that bad. What are the real risks?

The risk is that the solvency of the investment fund called the Vanguard Federal Money Market Fund is 100% reliant upon the solvency of the US Dollar. If the Dollar tanks, so will that fund. And then ALL that money saved up by private citizens will go down the toilet along with the fund.

Beyond that hair-raising risk we also have to consider the issue of choice. Choice has been removed from the consumer. There is no longer any choice in the matter. That's totally not fair, and definitely not in keeping with a free-market philosophy.

I'm just trying to figure out whether I need to take action, and if the risk is going to be greater in the Federal money market than in the regular old money market. If the economy or dollar collapses, it's going to be very bad either way.

What are you folks doing? Are you moving money out of money market accounts and putting them into bank savings accounts instead and keeping your settlement fund areas dry?

Do you believe the government will realistically grab the money from these new settlement funds? My dollars within IRAs are still individual, to me. (In theory, I know that the idea is that the government can do what it will when it feels like it and rules might get changed.) I'm just trying to think practically for today's circumstances.

At Vanguard, I was accustomed to seeing any one of the following cash funds as the "sweep accounts" for people who held brokerage shares:

Vanguard Federal Reserve Money Market (full of Federal Reserve notes from our good friends down at the Federal Reserve)Vanguard Treasury Reserve Money Market (full of US Treasury notes) -- THIS FUND IS NOW CLOSED TO NEW INVESTORS!!! In my experience at Vanguard, the only reason Vanguard ever closed a fund --a rare event indeed!-- was when way too many investors were suddenly swarming their way into the fund. So in order to protect the integrity and overall solvency of the fund, Vanguard had to set a cut off and stop new investors from entering the fund. Vanguard Prime Money Market (full of private banking notes from private banks but NOT anything governmental)

So here we see Vanguard --at the behest of the SEC-- preparing to irreversibly steer people away from the Prime Money Market and also (eventually) away from the Treasury Money Market, and force them exclusively into the Federal Money Market.

Let's hear it for our good friends down at the Federal Reserve.

I also recall one additional money market-style fund called the Vanguard Admiral Treasury Fund. I don't recall the difference between that Admiral Treasury Fund and the vanilla plain Treasury Fund. But they were IIRC two distinct funds.

I have never worked at Vanguard but I've been a client for a long time. In my recollection, the word "Reserve" has never appeared in the name of its money market offerings available to retail investors. Also, the information published by Vanguard (both currently, and over the years) has stated that the Federal money market holds securities that are issued by any of various US government agencies (as opposed to the Treasury money market, which could hold securities issued by the US Treasury Department only).

I haven't seen (currently or in the past) any wording that would say or imply that any fund at Vanguard holds primarily Federal Reserve Notes (in other words, paper currency denominated in USD). As far as I've ever heard, money market funds primarily (or exclusively) hold securities with very short maturities, not currency (or anything else issued by "our good friends down at the Federal Reserve").

As I've never worked at Vanguard, I'm not going to say what information is right or wrong, only that there is some discrepancy between what you reported above and what Vanguard itself has published (and I'm inclined to assume the accuracy of the latter, unless there's some corroborating reports of the former).

As for why Treasury money market was closed, I'd guess that when interest rates went to zero, maintaining that fund would cause a negative return after expenses.

As for Admiral Treasury, that was the same thing as Treasury money market, except that it had a $50,000 minimum per account, and a lower expense ratio (and correspondingly higher yield). In my recollection, that was the first instance of Vanguard using the term "Admiral" to refer to a fund with a higher minimum.

I'm just trying to figure out whether I need to take action, and if the risk is going to be greater in the Federal money market than in the regular old money market. If the economy or dollar collapses, it's going to be very bad either way.

What are you folks doing? Are you moving money out of money market accounts and putting them into bank savings accounts instead and keeping your settlement fund areas dry?

Do you believe the government will realistically grab the money from these new settlement funds? My dollars within IRAs are still individual, to me. (In theory, I know that the idea is that the government can do what it will when it feels like it and rules might get changed.) I'm just trying to think practically for today's circumstances.

My prediction is that no clients will see any significant difference in the new situation, other than Federal paying a lower interest rate than Prime money market (as it normally does) and Federal being taxed at a lower rate than Prime (depending on your tax situation). If there's a serious crisis (like 2009 or worse) then you might be better off in Federal, because Prime would have a higher likelihood of "breaking the buck" due to corporate issuers defaulting (which is only natural -- Prime pays higher interest rates due to higher credit risk). That is my estimate.

So what I'm doing is changing my settlement fund to Federal (since that's the only choice), and if I'm concerned about low yields, I can also keep some money in Prime and/or in some short-term bond funds (like the new Ultra Short, for example).

In my recollection, the word "Reserve" has never appeared in the name of its money market offerings available to retail investors.

Correction to my earlier comment: There was a time when Vanguard's money market funds were called "Vanguard Money Market Reserve" suffixed with a portfolio designation ("Prime Portfolio", "Federal Portfolio", etc.). But that had nothing to do with the Federal Reserve, and the term "Federal Reserve" did not appear in the fund name.

My point is that the above-described relationship between Vanguard's Federal money market and the Federal Reserve does not exist, and never has.

Vanguard Treasury Reserve Money Market (full of US Treasury notes) -- THIS FUND IS NOW CLOSED TO NEW INVESTORS!!! In my experience at Vanguard, the only reason Vanguard ever closed a fund --a rare event indeed!-- was when way too many investors were suddenly swarming their way into the fund. So in order to protect the integrity and overall solvency of the fund, Vanguard had to set a cut off and stop new investors from entering the fund.

In this case I think it was because the fund was earning close to zero on its investments, and the operating expenses exceeded (or nearly exceeded) the income.

I haven't seen (currently or in the past) any wording that would say or imply that any fund at Vanguard holds primarily Federal Reserve Notes (in other words, paper currency denominated in USD). As far as I've ever heard, money market funds primarily (or exclusively) hold securities with very short maturities, not currency (or anything else issued by "our good friends down at the Federal Reserve").

This has been generally true but the use of repurchase agreements muddies the waters as it is a back and forth transfer of securities and cash. The Vanguard Federal Money Market Fund is currently about 1/3rd repurchase agreements.

As for why Treasury money market was closed, I'd guess that when interest rates went to zero, maintaining that fund would cause a negative return after expenses.

It did reach the point that the return after expenses was heading negative. However, sometimes it is best to invest in the vehicle which loses the least and for this reason there was a rush to enter. Having so many investors move assets from other vanguard funds to this fund would have heavily impacted Vangaurd's own profitability so they closed it to new investors. Existing investors could still expand their positions. It was reopened to investors earlier this year.

My prediction is that no clients will see any significant difference in the new situation, other than Federal paying a lower interest rate than Prime money market (as it normally does) and Federal being taxed at a lower rate than Prime (depending on your tax situation). If there's a serious crisis (like 2009 or worse) then you might be better off in Federal, because Prime would have a higher likelihood of "breaking the buck" due to corporate issuers defaulting (which is only natural -- Prime pays higher interest rates due to higher credit risk). That is my estimate.

Respectfully I disagree. I am a Vanguard investor and I have already been negatively impacted. All of my settlements must now be placed in a fund which has exposure to defaults on repurchase agreements by foreign/mega banks and mortgage backed securities. Here are the top holdings of VMFXX:

In other words, during the next financial crisis any funds liquidation will first past through these types of entities to prop them up with me holding the risk. The only reason Vanguard is doing this is to avoid the even worse consequence in staying with the better funds, namely the liquidity fees and gates imposed on the existing settlement fund:

Respectfully I disagree. I am a Vanguard investor and I have already been negatively impacted. All of my settlements must now be placed in a fund which has exposure to defaults on repurchase agreements by foreign/mega banks and mortgage backed securities. Here are the top holdings of VMFXX:

I'm assuming by "negatively impacted" you mean you're being subjected to higher credit risk (as you mentioned, "exposure to defaults"), compared to Prime money market. This raises several questions:

Are the securities you're concerned about backed/collateralized by US gov't agency securities? (Please refer to "Strategy and Policy" of VMFXX.)

If a corporate-issued security is backed by a US gov't agency, is that more risky or less risky than a similar corporate-issued security without such backing (as might be held in Prime MM)?

For securities held in VMFXX that don't involve a corporation (such as directly-held US gov't agency securities), do you believe the credit risk is higher or lower than for corporate debt (assuming, of course, that Vanguard screens for quality, in keeping with its Strategy and Policy for both VMFXX and Prime)?

Assuming that the money market yields reported by Vanguard accurately reflect the market realities of the underlying securities, do you disagree with the aggregate market consensus (which values the underlying securities of VMFXX as being safer than those of Prime, at least as implied by the relative yields)?

If your position is that Prime is safer than Federal, that appears to be the opposite of the market consensus. I'm not saying that's wrong (in fact, some arbitrageurs have made a killing from being ahead of the markets), but I'll go with market consensus on this, until I see a convincing argument otherwise.

[Edit: I wrote this before realizing that Treasury MM still exists (it didn't show up when I looked at the fund list). If you're comparing to Treasury, then of course I agree that Federal has risks that Treasury doesn't have. If you find those risks unacceptable for your settlement account, then I guess you might try a brokerage account at a bank instead. I had used Prime for settlement and didn't worry about the risks -- to each his own.]

[Historical note: Prior to 2009, there was both "Treasury" (VMPXX) and "Admiral Treasury" (VUSXX). VMPXX was merged into VUSXX. Later, VUSXX changed its name to "Treasury", while keeping the $50,000 minimum.]

If a corporate-issued security is backed by a US gov't agency, is that more risky or less risky than a similar corporate-issued security without such backing (as might be held in Prime MM)?

Empirically, the VMFXX is not inherently less risky then the VMMXX. In fact, if you look at Morningstar you will see that both have the same alphas (-0.06 vs LIBOR) and the VMMXX actually has a LOWER r-squared. And the VMMXX is more liquid than the VMFXX (39 days average maturity vs. 51 days) which is important for a sweep account.

One of the assumptions in the statement above is that of "similar corporate-issued security". But that is the rub. The assets in VMMXX are not of the same fundamental type as those in the VMFXX. For example, the VMMXX can take advantage of yankee bonds/CDs. This provides geographic diversification while at the same time providing lower risks for the same (or even higher) yield. The Vanguard team has done a fine job of finding the cream of the crop of these opportunities.

The VMFXX on the other hand makes more use of repurchase agreements and government agency obligations. It can be argued that both of these are riskier in times of financial crisis. While the underlying assets of a repurchase agreement may be sovereign backed the agreement itself is not. So repurchase agreements are subject to default. Government agency obligations include things like mortgages and agriculture loans. Contrary to common beliefs, these are not guaranteed by the treasury. They are also subject to calls. This is where the government can end the agreement before the full maturity to offer new ones with lower yields. The net effect is the holder taking a haircut. They are also potentially subject to freezes during government shut downs.